The US Small Business Administration (SBA) has proposed new regulations that would provide an additional designation and requirements for impact-oriented Small Business Investment Companies (SBICs). “Impact SBICs”, as designated by the SBA, refers to investment companies that aim to generate positive financial returns alongside measurable social impact. This proposal is part of the SBA’s effort to increase the pool of investment capital devoted to low-to-moderate income (LMI) and underserved communities.
The SBA and the SBIC Program: Facilitating Long-Term Capital to US Small Businesses
The SBA’s mission is to provide aid, counsel, and assistance to American entrepreneurs and small businesses. Through the SBIC Program, the SBA facilitates the flow of long-term capital to American small businesses. However, instead of directly providing capital to small businesses, the SBA partners with and provides low-interest debt leverage to professionally-managed investment funds, or SBICs, that then finance small businesses (See Fig.1)
SBICs are privately-owned and operated investment companies that are licensed and regulated by the SBA. SBICs raise committed capital from their limited partner bases and combine these funds with debt leverage borrowed from the SBA at low interest rates, and invest exclusively in US-based small businesses. Investment firms primarily seek to become licensed as an SBIC in order to access debt financing provided by the SBA.
The SBIC Impact Fund and the Impact SBICs
As part of the Start-Up America Program and in an effort to support the development of the impact investing industry in the United States, the Impact Fund was launched within the SBIC Program in 2011. The SBIC Program allocates about $200 million in annual SBA-guaranteed leverage commitments to the Impact Fund, which is then available to Impact SBICs. Similar to traditional SBICs, Impact SBICs focus on providing capital exclusively to US small businesses, but also commit to deploy at least 50% of their invested capital through impact investments.
Impact SBICs make impact investments through two tracks: SBA-Identified Impact Investments and Fund-Identified Impact Investments.
SBA Identified Impact Investments are investment opportunities that have been pre-approved and identified by the SBA, usually around federal priority areas. These investments do not typically require additional impact measurement on the part of the Impact SBIC, as the SBA monitors the performance of these investments (See Fig.2).
Fund-Identified Impact Investments are impact investments identified by individual Impact SBICs, in order to fulfill their 50% investment commitment. However, Impact SBICs must assess the impact of their investments through a third party such as the Global Impact Investing Network's Impact Reporting and Investments Standards (IRIS), B-Lab’s Global Impact Investment Rating System (GIIRS), the Sustainability Accounting Standards Board (SASB), or another SBA-approved standard. (See Fig. 3)
Proposed requirements for Impact SBICs
The SBA has proposed amending requirements for Impact SBICs, including:
- Impact SBICS must be structured as limited partnerships
- At least 50% of the Impact SBICs capital commitments must be invested in small businesses fitting the SBA’s criteria
- Impact SBICs must invest within one of the investment tracks – SBA-Identified Impact Investments or Fund-Identified Impact Investments
- When marketing to potential investors, Impact SBICs must market their fund as an impact investing fund
- Impact SBIC must measure impact using one of several pre-approved impact measurement standards, completed by a third-party such as the GIIN’s IRIS or the SASB
The SBA and the Impact Investing Industry
The SBIC Impact Fund has the potential to catalyze the growth of impact-focused investments in the United States. With the availability of SBIC leverage, there is increased incentive for impact investors and managers to consider the Impact SBIC structure when pursuing values-based investments. And, by providing guidelines for impact measurement for participating Impact SBICS, the Impact Fund program can facilitate the development of non-financial impact metrics across the industry. The SBIC Impact Fund is another example of how government can play a vital role in the development of the impact investing industry (To learn more about the role of government in the impact investing industry, see: Pay for Success Impact Investments and IRS Ruling Makes Impact Investments More Accessible for Private Foundations).
